It’s a tough time to be in the fossil fuels business. Three of the four largest U.S. coal companies are bankrupt. More than 70 small oil and gas producers have folded since 2014, when oil prices began to collapse, and bigger drillers such as SandRidge Energy Inc. have started to join them (EnergyWire, May 17).
Then SunEdison Inc. filed for Chapter 11 protection last month, and it became clear that bankruptcies aren’t just a fossil fuel problem. They’re afflicting renewable energy, too. While each company’s management miscues and set of circumstances color the story of its path to bankruptcy, for all of them, recovering from the corporate punch to the gut means reimagining the future of coal, oil, gas and solar power.
What kind of future should a bankrupt company prepare for?
James Mesterharm, managing director at AlixPartners LLC and head of its turnaround and restructuring practice in the Americas, has helped dozens of troubled companies reorganize. He helped Eastman Kodak Co., for instance, get through its 2012 bankruptcy and transition to the digital age.
"Every bankruptcy is different, based on the situation in that bankruptcy, largely driven by, ‘What’s the value proposition of the company and what’s its capital structure look like?’" Mesterharm said. "And whether or not that value proposition holds promise in the market, that people are willing and interested in having it reorganized rather than sell off."
Bankruptcy is a case-by-case business, by nature. But there are some commonalties, and they will be key to how the energy industry reshapes itself. EnergyWire asked Mesterharm to point them out.
How they got here
Too much debt. That’s one common thread Mesterharm sees in energy: Companies borrowed too much money in good times, leaving them overloaded in bad times.
"If you roll the clock back three years, prior to the current malaise that’s enveloped China, a lot of the commodities were at or near their high," he said. Demand for oil and coal, for example, was outstripping supply, he noted, so companies were rolling out expansion plans.
But China cooled off, and coal prices plummeted. So much oil and gas was being shipped around the world, prices for those fuels eventually crashed, too. Suddenly, fossil companies were making a lot less money. Yet the debt that had accumulated to keep the commodity boom humming still had to be paid off. Walter Energy Inc., which Mesterharm worked on, filed for Chapter 11 protection after the price of metallurgical coal crashed from $300 per metric ton to $100.
What about renewables? SunEdison piled up $11.7 billion of debt in an expansion binge, which included buys in rooftop solar, wind and international markets like India. Investors became skeptical it could succeed in all those markets, and now it’s in Chapter 11.
What do they do now?
When Peabody Energy Corp. filed last month, it had nearly $9 billion of debt. But it also had a global coal business pulling in some $300 million a year (EnergyWire, April 14).
A business can be both bankrupt and profitable in some areas of its business, Mesterharm noted. A company slogging through restructuring just has to figure out what its core, profitable business is.
In coal, for example, that means dealing not just with debt, but also unions, pensions and environmental costs. Chapter 11 is a forgiving forum to renegotiate these contracts.
"Usually it’s not just done on the backs of the government and the workers. Oftentimes, the lenders are also taking very large haircuts," Mesterharm said. "But it all starts with determining the cash flows of the new business."
Cash flow depends largely on what you think oil, gas and coal prices are going to do. So a restructuring company has to persuade its lenders that its business plan can work under "conservative" price assumptions, Mesterharm said.
In renewables, he said, the debate will touch on future energy policies and technological advances.
"It’s the general nature of people to see the positive, the potential for upside, and maybe not want to fully crystallize a loss," Mesterharm said. "So they may want to take that bet, but they’re going to have to believe in the business plan that the company is putting forward."
Going to market
Last week, Alpha Natural Resources Inc. held an auction for its natural gas properties in Pennsylvania. The first offer had been set at $200 million. But the final offer came in at a princely $339.5 million.
It was a good haul for a bankrupt company that produced 8 percent of U.S. coal in 2014, according to the U.S. Energy Information Administration.
And it’s the kind of deal that bankrupt energy companies will need to strike as they try to raise cash and emerge from Chapter 11 — if indeed that’s their aim. The Department of Justice has asked if Alpha is effectively liquidating itself (ClimateWire, May 11).
But coal companies are struggling to find buyers. "I think if your company is mostly a domestic company, the pricing dynamic isn’t a whole lot different in Canada than it is in the U.S.," Mesterharm said. "There’s not really a large number of buyers who want to step into that business."
"It’s easier to sell assets in the oil and gas space than it is in the coal space," he said.
But in oil and gas, the buyers are largely from Wall Street, including hedge funds and private equity players.
"And so while it may be easier to sell the assets, the bid and the ask isn’t happening a ton here, because the buyers are looking for pretty big discounts," he said.
SunEdison will make an interesting foil for the fossil fuels. While solar and wind are growing worldwide, SunEdison is seen as having bought lower-quality projects than some of its peers did.
As SunEdison tries to cut weight, how will the market value these projects? Mesterharm couldn’t comment. As Bloomberg reported last month, two of SunEdison’s subsidiaries hired AlixPartners as advisers.